Register now for the GAQC Web event titled, The 2007 Yellow Book: What a Beginner Needs to Understand, to be held on Wednesday, February 9, 2011, from 1:00PM – 3:00PM (ET). See GAQC Alert #158 and the information in the body of this Alert for registration information.

Mark Your Calendars - Part II

The GAQC will hold another Web event titled, Walking Your Way Through the AICPA's Audit Guide for Performing Yellow Book and Single Audits, on Thursday, March 10, 2011, from 1:00PM – 3:00PM (ET). Registration information will follow in a separate GAQC Alert.

Mark Your Calendars - Part III

The 2011 GAQC Annual Webcast will be held on Tuesday, May 3, 2011, from 1:00PM – 3:00PM (ET). This Webcast is required viewing for firm designated audit quality partners (DAQPs) and state audit organization (SAO) designated audit quality leaders. More information to come in the future.

Stay Informed

To stay abreast of these and other relevant events, visit the GAQC Web site at: gaqc.aicpa.org. Also, we welcome any suggestions or questions. Please send them by e-mail to GAQC@aicpa.org.

GAQC members may only reproduce and distribute GAQC e-alerts internally within the firm or State Audit Organization to other Center member personnel as part of the organization's professional services. For information about permission to copy any part of these documents for redistribution or inclusion in other work, please click on the copyright notice at the bottom of the page or phone the AICPA copyright permission hotline 919-402-4031.

Dear Center Members

If your firm audits either supervised mortgagees, including depository institutions, or nonsupervised mortgagees (i.e., mortgage lenders), please be sure to pass this information along to your colleagues that perform these audits. Over the last several months, the Governmental Audit Quality Center (GAQC) has been actively involved in working with several federal agencies that are establishing financial statement and compliance auditing requirements for for-profit organizations. One example, which is the topic of this GAQC Alert, is new U.S. Department of Housing and Urban Development (HUD) audit rules for both supervised and non-supervised mortgagees.

After reading this GAQC Alert you will learn:

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The background of the new HUD audit requirements for supervised mortgagees, including a new Government Auditing Standards and compliance audit requirement;

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The latest information and guidance from HUD;

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Challenges for lenders and their auditors;

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The effects of the new HUD rules on nonsupervised mortgagees; and

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The availability to both GAQC members and non-GAQC members of a GAQC Web event titled, The 2007 Yellow Book: What a Beginner Needs to Understand, to be held on Wednesday, February 9, 2011, from 1:00 PM – 3:00 PM (Eastern Time (ET)). This Web event is intended to assist auditors that are performing Yellow Book audits for the first time. Note that our traditional GAQC membership ranks might also find this session useful for staff that are new to performing Yellow Book audits.

Background

In late 2009, HUD issued Mortgagee Letter 2009-31 titled, Strengthening Counterparty Risk Management (ML 2009-31), which resulted in sweeping audit requirement changes for supervised mortgagees that participate in the Federal Housing Administration (FHA) insured loan program. The new rules require a financial statement audit performed under Government Auditing Standards (also referred to as the Yellow Book) and a compliance audit under the Consolidated Audit Guide for Audits of HUD Programs (the HUD Guide). ML 2009-31 indicated that the effective date of the requirements was for fiscal years ending on or after January 2, 2010. Currently, there are many December 31, 2010, depository institution audits underway for which these new rules apply for the first time. Further, HUD is requiring that financial information and related audit results be submitted through the Lender Assessment Subsystem (LASS) within 90 days of the institution's fiscal year-end (for many institutions that would be March 31, 2011). Needless to say, there have been many questions about the rules from lenders and auditors, many of which have been submitted to the GAQC by member firms that also have banking practices. In October 2010, the Journal of Accountancy issued an article titled, AICPA Seeks Further Guidance From Regulators on New FHA Program Requirement, which provides a good summary of previous activities regarding these new rules and related auditor concerns and questions that were raised at that time.

A high-level summary of the audit requirements under the new rules include the following:

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A financial statement audit performed under Government Auditing Standards resulting in the auditor's opinion on the financial statements that indicates the audit was performed under both AICPA generally accepted auditing standards (or for issuers, standards of the Public Company Accounting Oversight Board (PCAOB)) and Government Auditing Standards. Click here to access a Government Accountability Office guidance document on using the Yellow Book with PCAOB standards.

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An opinion on certain supplementary information required by HUD, such as the net worth calculation, the new schedule of loan fees (see discussion below), and the hard copy of the LASS Financial Data Template (FDT) in relation to the audited financial statements.

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A compliance audit performed under the HUD Guide resulting in the auditor opining on compliance with HUD program requirements and related reporting on internal control over compliance. The AICPA's recently issued Statement on Auditing Standards (SAS) No. 117, Compliance Audits (AU sec. 801) is relevant to the compliance audit portion of the engagement when it is performed under GAAS. To learn more about SAS No 117, click here to listen to the GAQC's archived Web event that explains the requirements of the SAS.

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A submission by the institution of certain required financial information (including information about the audit) via the FDT into LASS within 90 days of the institution's fiscal-year end.

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A related Agreed-Upon Procedures (AUP) engagement that involves comparing certain information in the hard copy FDT and financial statements to the information submitted electronically into LASS. The agreed-upon procedures reporting is done electronically through LASS, although many firms also issue a separate hard copy AUP report to their clients as well.

The Latest Information and Guidance from HUD

Since HUD issued ML 2009-31, the GAQC, working in tandem with the AICPA's Depository Institutions Expert Panel, has met with HUD staff several times to address questions and concerns from lenders and auditors about the lack of clarity around certain elements of the new audit requirements, the introduction of the Yellow Book and compliance audit requirements in general, and the short timeframe to get the audits completed and submitted to HUD. Generally, HUD has not retreated from the original requirements it issued or relaxed the effective date or submission deadline. With that said, HUD has recently issued several pieces of guidance that we want to make you aware of as follows:

Mortgagee Letter 2011-05. This Mortgagee Letter titled, Revised Audited Financial Statement Reporting Requirements for Supervised Lenders in Parent-Subsidiary Structures and New Financial Reporting Requirements for Multifamily Mortgagees (ML 2011-05), was issued on January 5, 2011, and is effective immediately. It clarifies that supervised mortgagees should be following all other requirements in the HUD Guide for nonsupervised mortgagees (primarily found in Chapter 7 of that Guide) except for those modified in ML 2011-05.

Previously there had been confusion by lenders and auditors regarding the level at which the financial statement audit had to be performed when supervised mortgagees are in parent-subsidiary relationships. HUD attempted to answer this question in ML 2011-05 by stating that these supervised mortgagees can submit audited consolidated financial statements of a parent company, accompanied by internally prepared consolidating schedules, if one of two conditions are met (further described in ML 2011-05) and the fourth quarter Call Report is attached to the LASS submission. Since ML 2011-05 was issued, additional questions have been raised about the status of the guidance in ML 2011-05 versus what currently appears in Chapter 7 of the HUD Guide. Section 7-4(B) of Chapter 7 states that "HUD will accept the audits of the consolidated financial statements of the parent if it includes consolidating schedules, audited by the auditor, which distinguish the balance sheet, operating statement and computation of net worth…The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent, and the auditor's opinion must cover the financial statement accounts of the subsidiary." HUD has told us informally that they intended the guidance in ML 2011-05 to be additive to the guidance in Chapter 7 of the HUD Guide and that they are working on another amendment to Chapter 7 of the Guide to clarify this and several other matters (e.g., what is meant by internally prepared consolidating schedules in ML 2011-05 which we understand means "unaudited" schedules). As soon as this guidance is issued, we will inform you via a GAQC Alert.

Regardless of the level of the financial statement audit, ML 2011-05 goes on to remind lenders and auditors that the compliance audit and related reporting on compliance and internal control over compliance would have to performed and submitted at the FHA-approved lender level.

Finally, ML 2011-05 establishes a new requirement for both supervised and non-supervised mortgagees to report loan fees earned that exceed 5% of the insured loan amount on each FHA-insured loan over $2,000,000 endorsed during the mortgagee's fiscal year period covered in its audited financial statements. ML 2011-05 goes on to define loan fees and describes the requirements for a new separate schedule that is required to be included with the mortgagee's annual audited financial statements submitted to HUD.

Amendment to Chapter 7 of the HUD Guide. Soon after the issuance of ML 2011-05, the HUD Office of Inspector General issued a revision to Chapter 7 of the HUD Guide. The amendment, issued on January 19, 2011, incorporates the loan fees requirements of ML 2011-05 and establishes related auditor requirements. You can access the transmittal letter and chapter amendment by clicking here. The original version of Chapter 7 to which this document amends, can be accessed by clicking here. The amendment also includes Example G which provides a required format for the presentation of the schedule of loan fees for multifamily lenders.

Question and Answer Document. In January, HUD also released a document titled, Qs & As on Mortgagee Letter 2011-05, which includes three questions and related answers. Two of the questions provide additional clarifications regarding the loan fee calculation and what is included. The third question clarifies the effective date of ML 2011-05 and states that its requirements apply to any annual financial statements that are submitted by both supervised and non-supervised mortgagees after the January 10, 2011, effective date of ML 2011-05.

The Effects of the New HUD Rules on Non-Supervised Mortgagees

Non-supervised mortgagees have long been subject to audit requirements similar to that which HUD has now established for supervised mortgagees. For that reason, most of the questions and discussions we have heard from members about the new HUD rules have focused on supervised mortgagees. However, if your firm audits non-supervised mortgagees, you should be sure that the individuals involved in those engagements are aware that the loan fee requirements in ML 2011-05 and the related revisions to Chapter 7 of the HUD Guide described above are also applicable to non-supervised mortgagees. This could be overlooked by non-supervised mortgagees and their auditors since they may not have been closely following the supervised mortgagee guidance and rules.

Challenges for Lenders and Auditors

Understanding the Rules and Audit Requirements. We suspect that some lenders and auditors are not aware of the new HUD rules for supervised mortgagees or only recently became aware of them. We also believe there will be many depository institution auditors that have not previously performed a Yellow Book audit or compliance audit under the HUD Guide. Auditors will be challenged to learn about what these audits require and then implement the requirements in the timeframe being provided for submission. See the last section of this GAQC Alert for information on an upcoming Yellow Book training session that the GAQC will be holding on February 9th. Also, the GAQC is trying to arrange a CPE Web event on the detailed HUD requirements with HUD staff as the presenter sometime in the near future. If we are able to make this arrangement, we will send an update via a GAQC Alert with more information and registration details.

Level of Financial Statement Reporting. ML 2011-05 provided guidance regarding the level at which the financial statement audit had to be performed when supervised mortgagees are in parent-subsidiary relationships. There have been additional questions raised about the status of the guidance in ML 2011-05 versus what currently appears in Chapter 7 of the HUD Guide. See the section above on ML 2011-05 above for more detail.

Meeting the Submission Deadline. We have heard from some members that their clients are concerned that they will be unable to meet the 90-day submission requirement. In that HUD has decided not to formally relax or extend the submission deadline, the only recourse a supervised mortgagee would have if they anticipate not being able to meet the deadline would be to contact HUD as soon as possible to explain their individual facts and circumstances and to determine a course of action. The best way for supervised mortgagees to make initial contact with HUD regarding submission challenges is to send an e-mail to the LASS e-mailbox at LASS@hud.gov.

LASS Submissions. Unfortunately, the LASS FDT has not been updated to reflect the typical form and content of a supervised mortgagee's financial statements. HUD has indicated that while it may consider making changes to the FDT in the future, it will not accomplish these changes in the near term. Currently there has been a group of auditors working with HUD staff to determine if a mapping strategy can be developed. If so, it is anticipated that HUD would issue guidance delineating the mapping strategy as to how the supervised mortgagee's financial information should be "fit" into the existing FDT, and clarify line item descriptions included in the FDT. It is not clear whether HUD will issue this guidance in time for LASS submissions due by March 31st. If such guidance is not issued by HUD in time for the LASS submissions, supervised mortgagees will have to make their best efforts to "fit" their financial information into the LASS FDT and retain documentation to show how they did so. Some practitioners have questioned whether they will be able to indicate agreement in the related AUP engagement when supervised mortgagees' financial information does not exactly match the template in that it has been "fit" into the FDT. The GAQC has discussed this matter with our auditing standards team. The feedback received is that, generally, as long as the entity has made a good faith effort to classify the information appropriately and has maintained documentation to show how it accomplished the transition from the financial statements to the FDT and, at a high level, subtotals and totals are in agreement, that the practitioner would have a basis to indicate agreement. Note that the GAQC does plan to communicate with HUD in the future about the challenges the profession has with both LASS and the Financial Assessment Subsystem since they are not being updated by HUD for new financial accounting and reporting standards applicable to the various types of entities that are required to make submissions

GAQC Web Event to Assist Auditors in Understanding More About Yellow Book Audit Requirements

The GAQC is holding a Web event titled, The 2007 Yellow Book: What a Beginner Needs to Understand, to be held on Wednesday, February 9, 2011, from 1:00 PM – 3:00 PM (ET). Unlike typical GAQC Web events, this event will be open to both GAQC members and non-GAQC members as a public service.

As noted above, the new HUD rules require Yellow Book audits of supervised mortgagees for the first time. Additionally, several other federal agencies have either established or will be establishing audit requirements for for-profit organizations that require a financial statement audit (either of the entity or the program) under Government Auditing Standards, along with a compliance audit of federal funds expended. In addition to learning about the individual program and compliance audit requirements, auditors of these for-profit entities are now pressed to quickly learn about what it means to perform a Yellow Book financial audit. This GAQC Web event is intended to assist these auditors, as well as other staff new to performing government or not-for-profit audits.

The event will assist auditors in understanding the key requirements of the 2007 revision of Yellow Book and how it differs from the AICPA's auditing standards including a discussion of the Yellow Book Continuing Professional Education (CPE) requirements; independence rule differences; reporting on compliance, other matters (including abuse), and internal control over financial reporting; and requirements for reporting findings. Information will also be provided on how to access the Yellow Book, related guidance documents, and where you can go to learn more.

The presenters for the event are Florence Ostrum, CPA, a National Professional Standards Partner for Grant Thornton LLP, and Brian Schebler, CPA, who is the National Director of Public Sector Services for McGladrey & Pullen, LLP. There are 3 registration options as follows (see GAQC Alert #158 for more information):

GAQC Member Staff with CPE Option ($54 fee): Click here to register.

GAQC Member Staff with No CPE Option (no fee but each member generally asked to limit participation to one connection): Click here to send an e-mail to the GAQC to register for the GAQC Member No CPE Option. Please provide the firm name and individual participating.

Non-GAQC Member with CPE Option ($79 fee for AICPA members or $89 fee for non-AICPA members): Click here to register.

We hope you have found the information in this GAQC Alert to be useful to your practice. Watch future GAQC Alerts for additional updates in this area.

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Sincerely,
AICPA Governmental Audit Quality Center

Stay Informed

To stay abreast of these and other relevant events, visit the GAQC Web site at: gaqc.aicpa.org. Also, we welcome any suggestions or questions. Please send them by e-mail to GAQC@aicpa.org.

GAQC members may only reproduce and distribute GAQC e-alerts internally within the firm or State Audit Organization to other Center member personnel as part of the organization's professional services. For information about permission to copy any part of these documents for redistribution or inclusion in other work, please click on the copyright notice at the bottom of the page or phone the AICPA copyright permission hotline 919-402-4031.